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Organisations must consider all of their investment options and the impact that these have on the rest of the company. Opportunity costs are an important part of this and must be considered when decisions are being made. What happens when an organisation decides to purchase one machine over another? What is the opportunity cost of this decision? In this Week’s Collaboration, for example, an organisation must decide what asset will be most useful, a promenade or a restaurant. Every investment has its cost and by using capital budgeting you will be able to assess which decision will yield the best results.
To prepare for this Collaboration:
Read this Week’s assigned reading and reflect on how capital budgeting can help an organisation to make long-term investment decisions. What consequences might an organisation face if it does not use capital budgeting? Review the
four main methods used to evaluate investment opportunities. Think about the disadvantages and advantages of IRR and the other three methods, and how these could affect results.